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There is no one perfect forecasting tool, but markets are well ahead of whatever is in second place. Since the election of Donald Trump, markets have all been telling a fascinating tale: more economic growth, higher inflation, a stronger dollar, higher interest rates and—pay attention here, Mr. Trump—pressure toward even larger trade deficits.
Since Nov. 8, the yield on the 10-year Treasury has zoomed from just over 1.6 percent to nearly 2.4 percent. For the bond market, that’s a massive sell-off. Is the 35-year bull market in bonds finally over? The U.S. dollar rose to 13-year highs against a basket of foreign currencies. One U.S. buck buys $1.35 Canadian. Within the last five years, it bought as little as 97 cents. And behold the stock market! Conventional wisdom had it that equities wanted a Clinton win. A Trump victory would generate a Trump bear market—get ready for Dow 15,000. Instead, we got Dow 19,000.
Markets hint that an ongoing economic dispute is being resolved. Two competing views have dominated the policy debate over the past few years. The “Secular Stagnation” camp argued that market capitalism has had it. Post-2008 growth has averaged 1.2 percent, far below Reagan’s eight-year average of 3.6 percent. But, as the argument goes, this is all we can now expect. It’s the new normal. All that remains is to equitably redistribute this stagnant pie in the name of social justice.
The opposing “Bad Policy” camp (to which we belong) said nonsense. Capitalist animal spirits and attendant economic growth are alive and well if we’d only stop stomping on them. The list of anti-growth policies includes force-feeding costly renewable energy over cheaper fossil fuels, Obamacare mandates, a 35 percent nominal corporate tax rate and various executive actions that increase small-business costs. Mr. Trump proposed reversing or mitigating all of these.
It’s notable that, on election night, Dow futures initially dropped more than 800 points, thereby seeming to validate the Trump Bear argument. Then, when it became clear Trump would have a unified Congress to actually enact his promises, the Dow futures turned on a dime, recouped lost ground the same night, and heralded the Trump Bull. Goodbye stagnation, hello economic growth.
That’s great if it pans out. But there’s a trap for Mr. Trump. More growth and a higher dollar necessarily imply bigger trade deficits. Mr. Trump equates trade deficits with “bad” and “losing.” Let’s hope he settles for more growth.•
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Bohanon is a professor of economics at Ball State University. Styring is an economist and independent researcher. Both also blog at INforefront.com. Send comments to ibjedit@ibj.com.
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